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Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2284
Experience:  Certified Public Accountant
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Specifically California and IRS tax: I have a client that

Customer Question

Specifically California and IRS tax: I have a client that loaned money to a relative's business back in 2009. In 2015, it was clear that the business was failing, and the amount that was loaned in 2009 will be lost. The ceased operations. I want to treat this as a long-term capital loss on worthless security. My question is, which schedule is this best shown on (schedule D?). Also, does this qualify as qualified small business losses for the state of California?
Submitted: 11 months ago.
Category: Tax
Expert:  Mark Taylor replied 11 months ago.

Hi, my name is Mark. I will be happy to help you with your questions. Please give me a moment to prepare your response.

Expert:  Mark Taylor replied 11 months ago.

Below is the information provided from the IRS regarding non-business bad debt. I would agree with you that the amount should be reflected on schedule D.

Report a nonbusiness bad debt as a short-term capital loss on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and "bad debt statement attached" in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d). Use a separate line for each bad debt. It is subject to the short-term capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

Customer: replied 11 months ago.
Thank you. Sounds good. Much appreciated. I was thinking of treating the loss as an investment in worthless security in order to avoid the short-term capital gain rule and treat it as a long-term capital gain. Do you think that may be reasonable?
Expert:  Mark Taylor replied 11 months ago.

What kind of entity was it?

Customer: replied 11 months ago.
It was a c corp owned by the husband. A set up for IRS scrutiny, but they seem to be law-abiding and not looking to get over.
Expert:  Mark Taylor replied 11 months ago.

I was not suggesting that you were trying to get over. If there were stock ownership, would it have been reported on the schedule C (for instance would the amount be greater than 20% of the corporation?

Customer: replied 11 months ago.
Neither of them were reporting on schedule C - it was the husband's c corp reporting on an 1120 annual corporation return and not showing dividends because it was losing money. Well, in 2015, they decided the business was over. So I was thinking worthless stock long-term capital loss. But then CA also has some rules related to investments in small business c corps specifically.
Expert:  Mark Taylor replied 11 months ago.

So the wife lent the husband money?

Customer: replied 11 months ago.
The wife lent the husband's business the money
Expert:  Mark Taylor replied 11 months ago.

They both live in California?

Customer: replied 11 months ago.
Expert:  Mark Taylor replied 11 months ago.

Does the corporation meet the qualification for a section 1244 small business?

Expert:  Mark Taylor replied 11 months ago.

Did the C-Corporation show a balance sheet on the tax return?

Customer: replied 11 months ago.
I am reaching out to them now for the final 1120 return.
Expert:  Mark Taylor replied 11 months ago.

Does it meet the other requirements for 1244 treatment?